Home Economy The Bank of Canada is keeping a close eye on wages

The Bank of Canada is keeping a close eye on wages

by SuperiorInvest

Wage hikes risk entrenched inflation, warns Rep. Carolyn Rogers

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Wages appear set to dictate the pace at which the Bank of Canada raises interest rates for the rest of the year.

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Bank of Canada Deputy Governor Carolyn Rogers said last week that the central bank is concerned about spiraling wages and prices as workers take advantage of record number of vacancies insist on a salary increase that matches this year’s cost of living increase. This could cause inflation to take root, as employers would likely try to compensate for higher labor costs by charging more for goods and services.

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After a September 8 economic speech in Calgary, Rogers described the labor market as tight, contributing to the central bank’s decision that demand was outstripping the economy’s ability to keep up with orders. This is supporting inflation, which has climbed to an annual pace 7.6 percent in Julyslower than the previous month, but still well above the Bank of Canada’s two per cent target.

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Employees “are looking at the rate of inflation and what it’s doing to their purchasing power, their budgets, and they’re looking at equally tight labor markets and thinking, ‘I need a raise,'” Rogers told reporters.

Rogers’ remarks came a day after the Bank of Canada decided to increase the benchmark rate by three-quarters of a percentage point, which is the second supersized increase in a row after a one percentage point increase in July. Governor Tiff Macklem said one reason he is raising interest rates so quickly is to prevent those expectations from taking root, betting that any pain he inflicts now will be less than what it would take to suppress inflation if households and businesses lose confidence in the two percent target.

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“Fixing” inflation expectations “would hurt the economy,” Rogers said.

Still, Rogers emphasized that it was not within the central bank’s remit to provide advice on wage setting. The point of emphasis followed Macklem’s controversial comments earlier this summer, which some union leaders interpreted as encouraging employers to suppress wages.

“As a business, don’t plan for the current rate of inflation to remain,” Macklem said July 14 Q&A session hosted by the Canadian Federation of Independent Business. “Don’t build it into longer-term contracts. Don’t build it into wage contracts. It will take some time, but you can be sure that inflation will come down.”

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Another interpretation was that Mackle was simply urging his audience to believe him when he said that the Bank of Canada would do what was necessary to get inflation under control, even if it meant courting a recession.

There are signs that the economy is slowing. The labor market eased somewhat in August as the Canadian economy lost 40,000 jobscausing the unemployment rate to rise to 5.4 percent, far short of the 15,000 job gain that Bay Street economists had expected.

According to Royce Mendes, an economist at the Desjardins Group, the monthly decline was the third in a row, suggesting a slowdown. But Mendes added that average hourly wages rose 5.6 percent from August 2021, a faster pace than analysts had expected.

“We’ll be watching wages closely,” Rogers said. “We need supply and demand to return to balance across the economy and especially in labor markets. That will reduce pressure on wages.”

• By e-mail: shughes@postmedia.com | Twitter:

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